Despite more pain at the pump, EIA cuts back sharply on projections for flex-fuel and all-electric vehicles. Where are the alternatives?

When six press releases arrive from the biofuels community in the space of two hours, offering perspective and caution on the US Energy Information Administration’s annual energy outlook (through 2040) – you can figure that there’s a grenade in there aimed at biofuels.

Here in Digestville, we’d rather not work off yesterday’s 16-page early release, but wait for the final release in the springtime of the EIA’s case. But Washington rarely waits for the final data to come in to get a dogfight going — so let’s look at the controversies, and other elements in the report.

Bombshell #1

The report’s executive summary gets right into it:

“The AEO2013 projection is less optimistic than AEO2012 about the ability of advanced biofuels to capture a rapidly growing share of the liquid fuels market. As a result, biomass use in AEO2013 totals 4.2 quadrillion Btu in 2035 (compared to 5.4 quadrillion Btu in AEO2012) and 4.9 quadrillion Btu in 2040, up from 2.7 quadrillion Btu in 2011.”

The EIA adds: “While total liquid fuels consumption falls, consumption of domestically produced biofuels increases significantly, from 1.3 quadrillion Btu in 2011 to 2.1 quadrillion Btu in 2040, and its share of total U.S. liquid fuels consumption grows from 3.5 percent in 2011 to 5.8 percent in 2040. The increases are much smaller than those in AEO2012, however, as a result of diminished FFV penetration, a smaller motor gasoline pool for blending ethanol, and reduced production of cellulosic biofuels, which to date has been well under the targets set by the EISA. (EPA issued waivers that substantially reduced the cellulosic biofuels obligation under the RFS for 2010, 2011, and 2012.) In addition, the production tax credit for cellulosic biofuels is scheduled to expire at the end of 2012.”

Bombshell #2: Soaring energy prices

One area for concern by all motorists: the EIA expects that one heck of a lot more pain at the pump is coming your way. In 2011 dollar terms, gasoline prices are expected to jump 25 percent, and diesel is expected to jump 37 percent.

Although the EIA did not focus on jet fuel in its write-up – there’s pain ahead for the jet fuel market, as expressed in the spreadsheets. The air sector is expected to increase consumption by 9 percent, and in real dollars are looking at an 87 percent increase in jet fuel prices by 2040. In inflated dollars — well, get your helmets on.

The EIA writes:

Real prices (in 2011 dollars) for motor gasoline and diesel delivered to the transportation sector in the AEO2013 Reference case increase from $3.45 and $3.58 per gallon, respectively, in 2011 to $4.32 and $4.94 per gallon in 2040. Although both prices dip modestly over the early portion of the projection period, increases are steady thereafter. Motor gasoline prices in 2035 are slightly higher in AEO2013 than in AEO2012, but diesel prices are considerably higher in 2035.

The diesel share of total domestic liquids production rises, and the gasoline share falls, as a result of incorporation of the model year 2017 to 2025 GHG and CAFE standards for LDVs. Increasing demand for distillate puts pressure on refiners to increase distillate yield and results in higher prices relative to gasoline.

The overall report

The report — which you can download here — is generally bullish about US energy production in other areas – solar and wind: up. Tight oil: way up. Natural gas: way, way up. US oil production, which had fallen by a third since 1990, was projected to rise to higher-then-1990 levels (7.5 million barrels per day) by 2020, before tailing off to 6.1 million barrels per day in 2040.

On natural gas, the EIA reports: “Relatively low natural gas prices, facilitated by growing shale gas production, spur increased use in the industrial and electric power sectors, particularly over the next 15 years….After accounting for 16 percent of total generation in 2000, the natural gas share of generation rose to 24 percent in 2010 and is expected to continue increasing, to 27 percent in 2020 and 30 percent in 2040. In the AEO2013 Reference case, natural gas also reaches other new markets, such as exports, as a fuel for heavy-duty freight transportation (trucking), and as a feedstock for producing diesel and other fuels.”

What happened to advanced biofuels? A projected shortfall in flex-fuel vehicles.

The EIA writes that they have “Updated handling of data on flex-fuel vehicles (FFVs) to better reflect consumer preferences and industry response. FFVs are necessary to meet the Renewable Fuels Standard (RFS), but the phasing out of CAFE credits for their sale and limited demand from consumers reduce their market penetration.”

The EIA adds:

Sales of alternative-fuel vehicles in the AEO2013 Reference case are lower than those in AEO2012. The majority of the reduction relative to AEO2012 is reflected in sales of flex-fuel vehicles (FFVs), which in 2035 are about 1.3 million, or less than one-half the 2.9 million FFV sales in the AEO2012 Reference case.

Bad news for plug-in electrics, too.

The EIA projects: “Sales of battery-powered electric vehicles also are considerably lower in the AEO2013 Reference case than in AEO2012, with annual sales in 2035 estimated to be about 119,000, or 65 percent lower. Reductions in battery electric vehicles are offset by increased sales of hybrid and plug-in hybrid vehicles, which grow to about 1.3 million vehicles in 2035—about 20 percent higher than in the AEO2012 Reference case.

“Continued fuel economy improvement in vehicles using other alternative fuels, gasoline, and diesel, combined with growth in the use of hybrid technologies (including micro, mild, full, and plug-in hybrid vehicles), limit the use of electric vehicles over the projection. Although about one-half of new LDV sales in 2040 use diesel, alternative fuels, or hybrid technology, only a small share, less than 1 percent, are all-electric.”

E85 vs gasoline

An interesting EIA factoid. On a BTU basis, the EIA is projecting that, on a BTU-for-BTU basis, E85 ethanol will cost 20 percent less than gasoline by 2040.

US population increasingly sharply

Despite US efforts to rein in demand with energy efficiencies – such as sharply increased CAFE standards (corporate average fuel economy), demand is expected by EIA to remain flat because of a 29 percent expected increase in the US population by 2040. Though 54.5 miles per gallon standards for new model year cars in 2025 will limit the increase in light duty vehicle fuel demand, the truck sector is expected to grow.

The EIA writes:
Total U.S. population increases by 29 percent from 2011 to 2040, but energy use grows by only 10 percent, with energy use per capita declining by 15 percent from 2011 to 2040.

Higher industrial output in AEO2013 leads to greater growth in vehicle-miles traveled by freight trucks, which leads to higher energy demand by heavy vehicles in AEO2013 as compared with AEO2012.

The Digest’s Take

Overall, the EIA adjustments are not entirely unexpected. The opportunities to expand the US market for ethanol and biodiesel look to be more limited today than in 2007, when there was significant hope that a combination of E85 ethanol demand and rising availability of flex-fuel vehicles would, as it had in Brazil, lead to broad and deep demand.

But then corn prices rose, E85 became uneconomic for most motorists – and in the wake of food-vs-fuel, enthusiasm for ethanol cooled substantially, exacerbated by the slow deployment of cellulosic biofuels compared to expectations that were set into EISA targets in 2007.

The challenges? Ensuring that higher blends of ethanol cost less than gasoline. Developing low-cost biodiesel and renewable diesel for an expanding truck market. Bringing forward an affordable renewable jet fuel into a market facing 87 percent prices increases (in real dollars) from their current sources.

And, let us be frank: drop-in, drop-in, drop-in. Comparable prices, comparable infrastructure, comparable performance. That’s what consumers generally ask for, and the EIA case is tending to see it that way.

Industry reaction

Mike McAdams, President, Advanced Biofuels Association

“Some will claim that EIA’s report is grounds for reopening the RFS. That’s a short-sighted argument made in an effort to protect market share and stop innovation.”

Tom Buis, CEO of Growth Energy

“The renewable fuels industry can meet the volume goals of 36 billion gallons by 2022 as set by the Renewable Fuel Standard (RFS), but scaling the blend wall and increased market access is the key.

“Currently the blend wall is preventing additional use of biofuels. While grain-based biofuels, such as corn ethanol have not only met, but exceeded the goals, the blend wall has prevented full saturation into the commercial marketplace and has discouraged investments in next generation biofuels.

“Growth Energy and the biofuels industry will continue to work with retailers and consumers to educate them on higher blends, such as E15 and continue to garner the support necessary to break through the blend wall, providing additional choices and savings for the consumer.”

“It is also important to note that EIA and other agencies’ multi-year projections have consistently lowballed alternative energy forecasts in favor of the status quo.

“In 2001, EIA projected there would be 2.79 billion gallons of ethanol in 2011—the industry actually churned out 13.39 billion gallons by that time. Investors, businesses and community leaders have shown that they can meet and exceed expectations when it comes to energy alternatives and the renewable fuel story will be no different.”

Bob Dinneen, President and CEO of the Renewable Fuels Association

“The EIA has consistently proven Yogi Berra right, ‘the future is hard to predict’. The agency has consistently underestimated biofuels productions and the ability of the market to respond to progressive energy policy. Nevertheless, the EIA projections make a strong case for redoubling efforts to expand consumer choice and open our fuel markets in a more meaningful way. If we don’t take concrete steps today toward opening the fuel market to renewable alternatives, we’ll be relegated to a future of more petroleum — and it will come from increasingly dirtier sources. If we don’t act now to conquer the E10 blend wall, accelerate E15 commercialization, and provide American drivers with real choices at the pump, we will be condemned to the oil-dependent future outlined in EIA’s projections.”

“Keep in mind EIA has a history of grossly underestimating the ingenuity and productivity of the American renewable fuels industry. In its 2001 projections, released just 10 years ago, EIA predicted the U.S. would produce just 2.8 billion gallons of ethanol in 2011 — in actuality, we produced nearly five times that amount last year. That shows renewable fuels technologies can be scaled very rapidly when they are allowed to compete more fairly with oil and when the right federal policies are put in place. EIA has bet against renewable fuels and lost in the past. Why should we believe the outcome will be any different in the future?”

Brooke Coleman, Executive Director of the Advanced Ethanol Council:

“A little historical context is in order here. The Energy Information Administration underestimated the growth of the conventional biofuels industry by 400 percent, and predicted that the price of oil in 2011 would be below $22 per barrel, when it was well over $100. What EIA is calling out is the reality that motor fuel markets are not free markets, and without reform will slow the growth of the most innovative fuels in the world. This is nothing new. We have a simple choice. Open the markets and create real consumer choice with renewable fuels, or let foreign oil once again monopolize the pump. We know that the path to meeting the Renewable Fuel Standard (RFS) depends on reforming the marketplace, and we are confident that we can do that.”

Adam Monroe, President, Novozymes North America

“As oil prices climb, Americans deserve affordable alternatives. We agree it’s going to take a mix of solutions to meet our nation’s energy needs. Biofuels have proven they are one of those solutions, reducing prices at the pump, creating careers and economic growth, reducing carbon emissions, and putting steel in the ground in rural communities. If smart, market-based policies like the RFS are maintained, advanced biofuels will continue to succeed and grow.”

“Biofuels have already created more than 400,000 good paying jobs, $42 billion in economic activity last year and reduced our foreign oil imports by 25 percent. Advanced biofuels have the potential to support 800,000 careers by 2022 while continuing to enhance the energy security of the United States.

American Coalition for Ethanol Executive Vice President Brian Jennings

“Congress designed the RFS as a flexible and forward-looking policy to serve as a catalyst for biofuel use, and by design, the RFS is built to help break through the blend wall,”

“EIA, on the other hand, makes its projections based on market conditions and known technology. Ten years ago, the EIA Outlook said we could only make 3.4 billion gallons of ethanol in the U.S. by 2020. Congress deemed that unacceptable, and passed the RFS to encourage alternatives to oil, and they were right. The RFS works. Our industry produced almost four times that much ethanol two years ago – ten years ahead of schedule.”

“EIA also appears to recognize that current market conditions include an artificial limitation on ethanol use, known as the blend wall, which is a creation of Big Oil and their supporters in Congress. The oil industry is spending their time and tens of millions of dollars trying to repeal the RFS through frivolous lawsuits and anti-competitive Congressional action, rather than working with retailers and ethanol producers to break down that wall by blending newly-approved E15 and other ethanol-blended fuels. It’s a little bit like a five-year-old trying to get his parents to say he doesn’t have to eat his vegetables by whining and refusing to even try them. We can’t allow oil companies to overturn a policy that’s good for all of us simply by refusing to follow their rules.”